SLIDE 1
Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82 Paper presented for the 4th International PPP Conference, Geneva 3-4 February 2011
Sverre Knutsen Norwegian School of Management
SLIDE 2 Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82
- The purpose of my paper is the describe and
analyse the causes of banking crises
- And more specifically: Which causal factors
can be identified as crucial for building up
- f financial imbalances to such an extent
that they trigger a systemic banking crisis?
- To answer the question I study two cases that
are different in many ways, but have experienced systemic banking crises
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SLIDE 3 Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82
- I hope the analysis of the cases reveal
common patterns
- However, it is important to realize that each
banking crisis in history also has unique features
- Moreover, it has to be emphasized that
financial crises are complex processes, and that the search for mono-causal explanations will not work
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SLIDE 4 Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82
- In his “Essays on Instability and Finance”, from
1982, Hyman P. Minsky asked: Can “It” Happen Again?
- “It” – that is a systemic financial crisis
subsequently causing a deep economic depression
- Up until the late 1980s the conventional
wisdom among Norwegian economists and policymakers that “It” “couldn't happen here”.
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SLIDE 5 Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82
- Robert E. Lucas in his "presidential address to the
American Economic Association”, 10th of January 2003: “My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression- prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”
- Hence, Lucas obviously excluded the possibility
that “It” could happen again in the USA
- Obviously, they were all wrong.
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SLIDE 6 Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82
- In my paper I have chosen a theoretical and
analytical framework from Hyman Minsky – in particular his “Financial Instability Hypothesis”
- Minsky’s theory is an attempt to a fully
endogenous explanation of the causes of financial crises.
- Minsky mainly generalises upon experiences
from post-war USA
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SLIDE 7 Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82
- “Within the neoclassical synthesis a serious depression
cannot occur as a result of internal operations of the
- economy. In this theory a serious depression can only
be result of policy errors or non-essential institutional flaws” (Minsky)
- A capitalist economy is inherently unstable and crisis
prone
– Financial system is vital to dynamism in a capitalist economy – Driven by innovations and search for profit – M makes a distinction between three types of financial positions: hedge, speculative and Ponzi
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SLIDE 8 Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82
- The basic Minsky cycle
- Over the business cycle and especially during a period
- f boom and prosperity, the financial structure of a
capitalist economy become more and more fragile
- It is the mix of the different financial positions that
eventually trigger a financial crisis
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SLIDE 9 Why did “It” happen again? The American Subprime Crisis Compared with the Norwegian Banking Crisis 1987-82
- The Minsky super cycle
- The institutions of capitalism are vital to stabilize the
- economy. However, the actors continuously press to
alter the rules of the game and change the institutional and regulatory framework
- Thus, there is a long-term deterioration of the major
stabilizing institutions, finally bringing about a new regulatory regime
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SLIDE 10
Comparison Hyman Minsky: “...there are as many varieties of capitalism as Heinz has pickles.”
NO US Economy Small,open High GDP per head Income spread: egalitarian World’s largest High GDP per head Income spread: non-egalitarian Political system Parliamentary Presidential Supervisory system In transition from fragmented to integrated (from 1986) Fragmented Banking structure Universal banks, Nationswide branch- banking from late 1960s Specialized Fragmented, Radical change after 1980 10
SLIDE 11
Comparison
NO US Financial system characteristics Bank based Market based 11
SLIDE 12
Comparison
NO US Financialization Y Y Safety-net Y Y Regulations (legislation) Tight Liberalization after 1975, Extensive de-reg. 1983-87 More lax Liberalization after 1980 Extensive de-reg. From late 1990s Financial innovations Y Y Funding characteristics during run-up to crisis Increased share of short- term debt Increased share of short- term debt Steep increase in corporate and household debt Y Y 12
SLIDE 13
Comparison
NO US Asset price inflation Y (stock market and housing/real estate bubbles) Y (housing bubble) Substantial capital inflow Y Y Wages/salaries to GDP Preceded by decreasing w/GDP ratios Consumption maintained by increased debt Preceded by decreasing w/GDP ratios Consumption maintained by increased debt 13
